High oil prices affecting airlines

by Business Case Studies on Tuesday 10th June, 2008

High oil prices affecting airelines

These are difficult times for many businesses and those for whom external influences such as fuel costs are a major item are being hit hard. Sound financial planning is necessary to keep the business on track and enable it to survive downturns and make a profit or at least break even.

Michael O'Leary, chief executive of Europe's largest airline Ryanair and known for an aggressive management style, says he welcomed high oil prices as it would drive”crappy competitors” out of business. So far this year, more than a dozen airlines worldwide have gone out of business because of the cost of fuel and Mr O'Leary expected that only five carriers, Ryanair, EasyJet, British Airways, Air France and Lufthansa would survive. (The Times, 4 June 2008)

However, some of Ryanair's decisions have not been fool-proof, as with the decision to take only minimal hedging against rising oil prices. This has left the airline almost completely exposed to oil at more than $130 a barrel, whereas some other airlines have hedged and bought ahead. In addition, Ryanair also embarked on increasing its fleet of aircraft, taking delivery of 30 extra last year and adding a further 40 this year in the face of the rising prices and falling consumer demand. Mr O'Leary argues that these additional aircraft will allow him expansion options although he is planning to ground 20 aircraft during the winter to cut capacity. Ryanair has also announced that it would take a 92 million Euro write-down on its investment in Aer Lingus. The airline bought a 29.2% stake last year but has been blocked from buying Aer Lingus outright for competition reasons. (The Times, 4 June 2008)

Although predicting that fares would rise by 5%, Ryanair says it expects only to break-even next year if oil prices stay near $130 a barrel. Last month the airline advised that it would increase its check-in charges by £1 to £4 per passenger and by £2 to £8 per bag to try to reduce its airport costs. Mr O'Leary said: We are trying to persuade passengers to carry hand luggage and to fly in a way that cuts our costs to a minimum. If you want additional services like checking in a bag or using a credit card to pay, you have to pay for those services. (BBC News, 3 June 2008)

He rejected the suggestion that these charges were fuel surcharges in disguise and said Ryanair would not make its customers pay fuel surcharges. He added: It's a guarantee – oil at $150, $200 a barrel, there will be no fuel surcharges on Ryanair. (BBC News, 3 June 2008)

See the Times 100 theory on business planning, an essential requirement if a business is to succeed and on calculating the break-even point.